Feb 26, 2021
What attitude should you hold towards the high-risk Bitcoin?
Another reason for opposing investment in Bitcoin mainly stems from the attitudes of governments around the world. Some people commented that one of the values of Bitcoin is that it can realize free cross-border payments and capital transfers. However, the prerequisite for realizing this value is that governments must allow Bitcoin to grow and be accepted by more merchants, institutions, and banks. So far, there is no sign that Bitcoin will be recognized by the mainstream governments and financial institutions. This also increases the transaction cost of Bitcoin. Whether you want to buy or sell bitcoins or invest in the bitcoin funds, you are required to pay relatively high transaction costs, and bear certain credit risks. These factors make investors think twice before buying bitcoin on a large scale.
So, after comparing support and opposition, what attitude should we hold toward Bitcoin?
We might as well use the data to analyze. According to Arnott (2021), Bitcoin’s return is much better than stocks in the past 10 years, but its price volatility is also very large, with a maximum drawdown of 82%. In other words, if an investor buys 100 yuan of bitcoin, in the most extreme case, the market value of the bitcoin on hand is only 18 yuan. Due to the high volatility of Bitcoin prices, even if only a small amount of Bitcoin is purchased, it will greatly increase the volatility and drawdown of the investment portfolio.
If you replace 1% of Bitcoin in a pure stock portfolio, then the investment portfolio containing 1% of Bitcoin will increase the annual investment return by about 7.3%. However, at the same time the maximum drawdown will increase to about 33%. If you replace 5% of stocks with Bitcoin in your portfolio, the annual return will increase by about 30%, but the maximum drawdown will also increase to 62%. If you replace 10% of stocks with Bitcoin within your investment portfolio, the maximum drawdown will increase to 71% while the annual return increases by about 50%.
With that, we can see a clear trade-off relationship: If you want to increase the return of your investment portfolio through Bitcoin, you must accept higher risks. Even if only a small amount of Bitcoin is included in the portfolio, the market value of the entire portfolio will fluctuate depending on the rise and fall of Bitcoin. For most individual investors, such a rise or fall is obviously too great to be accepted at ease.
In summary, Bitcoin has achieved amazing price increases in the past ten years. It has a certain hedging value against the depreciation of the U.S. dollar and inflation risks, but it does not generate endogenous cash flow. Its price fluctuations are highly speculative, and the government as well as financial institutions have an ambiguous attitude towards it. These factors limit the investment properties and the future price growth of Bitcoin. As the price of Bitcoin fluctuates too much, individual investors should invest with caution. If you really want to include Bitcoin in your investment portfolio, the allocation ratio should also be controlled at a relatively low level to ensure that the risk and drawdown of the investment portfolio are within an acceptable range. The main reason is due to high price of Bitcoin. Nevertheless, there is a good project for investment, namely the NGK. It has the right price, moderate risk, and a steady rise of computing power. In addition, it has various airdrop rewards, such as SPC, VAST, etc. Currently, the NGK official is focusing on supporting the NGK computing power. Thus, now is the best time to join NGK!
